Barclays' Libor Scandal

Barclays' Libor Scandal 

"Honest, trustworthy and aboveboard" is the three important business purposes that barclays established over 300 years ago. From a small gold shop on the streets of London to the current financial Titan, barclays has achieved such a success through its three aims.

But when Bob diamond, who was caught up in the Libor scandal and had to resign, was asked in parliament what was barclays' most important  aim, he was hesitant. This is really surprising. Barclays' employees were asked to study these three purposes when they entered the company. However, the scandal has proved that barclays has completely betrayed its fundamental principles. In December 2007, a barclays bank employee once wrote in a letter: "in essence, we are becoming dishonesty, and could damage our reputation in the eyes of market and regulatory agencies."

Ironically, as the employee wrote the email, barclays was preparing to play "financial hero". In the wake of the international financial crisis in 2008, barclays, unlike other major British Banks that needed government help, successfully bought Lehman brothers' American operations.

Mr Diamond, who led barclays in the investment banking business, has been promoted from head of investment banking to chief executive. But with the outbreak of the interbank interest rates scandal, diamond had to resign under pressure, and even investment banking faces huge uncertainty - barclays stripping or reduce the possibility of investment banking department.

Although the scandal sounds more convoluted than other recent scandals, it has a very real impact and Libor is the benchmark for the world's $350tn loan contract. Libor is determined by a set of Banks based on their average interbank borrowing costs. But, as regulators in barclays settlement released documents show, this process was systematic abuse by many Banks in many years, this kind of behavior started before the crisis happened and continued to during the crisis.

Such index of derivatives markets is crucial, because the trillions of dollars of swaps and the trading of futures contracts depends on the benchmark price, they also decided to the price level of the mortgage loans and deposits, and other products. That gives traders a lot of incentive to distort prices to make money for themselves.

As early as before the outbreak of manipulation of the LIBOR scandal, in the city of London has rumors such as "the style of barclays too radical, high risk appetite", "why is it can do some other Banks could not do". At the time, it was often interpreted as an envy of a financially sound bank. Scandal after exposure, it was found that there are some things that really is an open secret, this has the world's most complete for like financial regulation and service system of the city of London is a blow.

Now, the blame is on the bank of England. People have questioned the bank of England's failure to regulate, even to ignore the Banks' manipulation of LIBOR, encouraging even acquiescence. Under the circumstances, the British government has decided to review the LIBOR rate. Mervyn king, governor of the bank of England, said the London interbank offered rate needed a "radical overhaul".

The use of LIBOR has been entrenched, involving the pricing of hundreds of millions of dollars of financial products, particularly in the form of LIBOR, which dominates interest rate trading. Given the excess of financial derivatives pricing possible confusion, LIBOR in the short term will not be replaced by other reference rate, but its formation mechanism reform will face several aspects: one is on offer bank, should increase the number of Banks quotation. The British bankers' association may be based on the current, into more systemically important bank as LIBOR quote line, in order to reduce the influence of a single bank quotation, optimize the composition of the offer members at the same time, changes to the European bidding behavior main body structure, increase the number of other parts of the quotation, make quotation rate more reasonable. That would produce a more representative interest rate. Secondly, in the way of quotation, we should take the actual transaction as the standard, and adopt an anonymous quotation, and reduce the possibility that the quotation will be kept under the extra attention due to the concern of its above-average quotation. Third, in the quotation system, the interest rate quotation must be based on the actual transaction rate to strengthen the audit and supervision of interest rate quotation and related process.

After the Libor manipulation, 12 multinational Banks linked to it would pay high compensation and people's trust in Libor would drop.